STRENGTHS

WEAKNESSES

Severe tensions between the Shiite majority holding power and the rest of the population

Tensions with autonomous Kurdistan and major contributor to the oil and gas sector

Cost of reconstruction and aid to victims following armed conflicts

Small size of non-oil and gas private sector in GDP

Weak and limited banking sector

Failings in the education, healthcare and social protection system

Risk assessment

Growth stimulated by the improving security situation

Following a contraction in 2017, growth should return to the positive in 2018, driven by a slight increase in oil and gas production and an expansion in the non-oil and gas GDP. The recovery in oil prices, as well as the payment of part of the arrears by the State to the international oil companies, is expected to encourage a slight increase in oil production, to around 4.776 million barrels per day (mbpd) compared with 4.556 mbpd in 2017. The occupation by government forces of the oil fields in the Kirkuk province, until then controlled by the Kurds, should also enable a better control over production. This will however remain subject to limits because of the lack of investment in the sector and the OPEC agreement on the 30th November 2017 to reduce production, very likely to be extended in April 2018. The non-oil and gas sector should benefit from the improved security situation following the territorial gains from Daesh. The agricultural sector is also expected to benefit significantly following the liberation of the country’s most productive provinces in the northeast. The improved security situation, together with the payment of USD 824.8 million by the IMF, as part of the USD 5.4 bn Stand-By Arrangement signed in July 2016, should help reassure investors. In addition the construction sector should benefit from the reconstruction effort in the newly liberated territories. In terms of demand, the easing of the security risks and the low rate of inflation should encourage household consumption, whilst infrastructures investments will drive up public spending. Finally, external demand is expected to make a positive contribution to growth, thanks to the volume and price effects of oil exports (94% of exports in 2016).

Persistent current account and public deficits

With 90% of budget revenues coming from oil, the rise in oil prices, together with the structural adjustment covered by the agreement with the IMF, should help to reduce the public deficit in 2018. Budgetary reforms, including a reduction in expenditure, in particular in terms of government employee wages (40% of public spending), with the curtailing on non-wage benefits and the non-replacement of retiring staff, together with an increase in revenues (higher indirect taxes). A drive to reduce payment arrears (5.5% of GDP at the end of 2016, 68% domestic) has been launched but remains constrained by weak revenues. The public deficit is financed through multilateral loans, which are driving up the public debt (66.7% of GDP in 2016 against 31% in 2013). The sustainability of the debt would seem to have increased thanks to a reduction in the bond yield rate (8.7% in July 2017 against 14% in February 2016) as oil prices recover and thanks to recent fiscal adjustments. Following the second IMF Review in August 2017, the government carried out a bond issue of USD 1 billion, without the need for an international guarantee. In terms of the current account, the trade balance is in surplus (0.7% of GDP, 2017 estimate), thanks to increased oil exports, whilst the services balance is in deficit (6.8% of GDP), as well as the income balance (0.9% of GDP, linked with the servicing of the debt). This deficit is partly financed by FDI (1% of GDP), as well as multilateral (USD 1.4 billion loan from the World Bank at the end of 2016) and bilateral loans. The funding deficit nevertheless amounted to 0.9% of GDP in 2017, financed from currency reserves (6.2 months of imports in 2017 against 10.8 in 2013). Finally, the downwards pressure on the Iraqi dinar is expected to weaken as the security situation improves and with rising oil prices, enabling the Central Bank to maintain the peg with the dollar.

Parliamentary elections scheduled in a security and political context that remains tense

2017 saw the recapture of Mosul by Iraqi national forces, with the support of the international coalition, Kurdish forces and various militias, and the defeat of Daesh in most of Iraq. The independence referendum (92% yes) in the Kurdistan autonomous region which contains a major portion of Iraqi oil reserves, was harshly dealt with by the Iraq government. It responded with the annexation of the Kirkuk region, held by the Kurds since 2014 and whose oil reserves are vital for the financing of an independent state. This handling of the Kurdish crisis and the victory over Daesh have strengthened the position of the Shiite Prime Minister, Haider al-Abadi, and his likelihood of winning the parliamentary elections in May 2018, over his rival Nouri el Maliki. The support of Osama al-Nujaifi, the highly influential Sunni leader in the Mosul region, for H. el-Abadi further increases his chances of winning. Nevertheless the situation in Iraq remains riven by ethnic and religious rivalries, with denominational militias continuing to hold sway in certain regions. There are more than 5 million refugees and internal displaced persons and the threat of terrorist attacks is a constant reality, with a large number of attacks. Finally, the business climate remains very poor, marked by a high level of corruption.